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    Chapter 3: The Time Value of Money: Annuity

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    Ahmad Medlej
    Here is the solution: N=24, J=21 P21 = A(P/A,12%,4) = $2000(3.0373) = $6074.60 P24 = F(P/F,12%,3) = $6074.60(1.3849) = $8,410.59 So the equivalent worth as of the son's 24th birthday is $8,410.59.

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    Chapter 3: The Time Value of Money: Annuity

    Uploaded by

    Ahmad Medlej
    57 views32 pages
    Here is the solution: N=24, J=21 P21 = A(P/A,12%,4) = $2000(3.0373) = $6074.60 P24 = F(P/F,12%,3) = $6074.60(1.3849) = $8,410.59 So the equivalent worth as of the son's 24th birthday is $8,410.59.

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    Lecture

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    lec2-annuity-deffered annuity-2019

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    Here is the solution: N=24, J=21 P21 = A(P/A,12%,4) = $2000(3.0373) = $6074.60 P24 = F(P/F,12%,3) = $6074.60(1.3849) = $8,410.59 So the equivalent worth as of the son's 24th birthday is $8,410.59.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    57 views32 pages

    Chapter 3: The Time Value of Money: Annuity

    Uploaded by

    Ahmad Medlej
    Here is the solution: N=24, J=21 P21 = A(P/A,12%,4) = $2000(3.0373) = $6074.60 P24 = F(P/F,12%,3) = $6074.60(1.3849) = $8,410.59 So the equivalent worth as of the son's 24th birthday is $8,410.59.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 32

    Chapter 3: The Time Value of Money

    Annuity
    Annuities: Definition

    An annuity is a series of periodic payments, usually


    made in equal amounts. The payments are computed by
    the compound interest method and are made at equal
    interval of times, such as annually, semiannually,
    quarterly, or monthly.
    Annuities: Definition

    Term of an annuity

    Origin A = Uniform Amounts =Periodic Payments


    A A A A A

    0 1 2 3 N-1 N

    Payment Interval
    P= Present Equivalent F= Future Equivalent
    Annuities: Definition

    Today 1 2 3 4

    $10,000 $10,000 $10,000 $10,000

    End of year 1

    End of year 2

    End of year 3
    End of year 4
    Future Value of an Ordinary Annuity

    To find the future value


    of an ordinary
    annuity, multiply the
    amount of the
    annuity by the future
    value of an ordinary
    annuity factor.
    Annuities: Amount of an annuity –
    Finding F Given A

    How much will you have in 40 years if you


    save $3,000 each year and your account
    earns 8% interest each year?
    Annuities: Present Value of an annuity –
    Finding P Given A

    How much money is needed today to provide


    an annual amount of $50,000 each year for
    20 years, at 9% interest each year?
    9
    Annuities: Present Value of an annuity –
    Finding P Given A

    How much money is needed today to provide


    an annual amount of $50,000 each year for
    20 years, at 9% interest each year?
    Annuities: Finding A Given F

    How much would you need to set aside each


    year for 25 years, at 10% interest, to have
    accumulated $1,000,000 at the end of the 25
    years?
    Annuities: Finding A Given F

    How much would you need to set aside each


    year for 25 years, at 10% interest, to have
    accumulated $1,000,000 at the end of the 25
    years?
    Annuities: Finding A Given F

    If you had $500,000 today in an account


    earning 10% each year, how much could you
    withdraw each year for 25 years?
    Annuities: Example

    You wish to withdraw $10,000 at the end of


    each of the next 4 years from a bank
    account that pays 10% interest
    compounded annually.

    How much do you need to invest today to


    meet this goal?
    Present Value of an Annuity

    Today 1 2 3 4

    $10,000 $10,000 $10,000 $10,000

    PV1
    PV2
    PV3
    PV4
    Present Value of an Annuity
    PV of $1 Present
    Annuity Factor Value
    PV1 $ 10,000 0.90909 $ 9,090.90
    PV2 10,000 0.82645 8,264.50
    PV3 10,000 0.75131 7,513.10
    PV4 10,000 0.68301 6,830.10
    Total 3.16986 $ 31,698.60

    If you invest $31,698.60 today you will be able to withdraw


    $10,000 at the end of each of the next four years.
    Present Value of an Ordinary Annuity

    PV of $1 Present
    Annuity Factor Value
    PV1 $ 10,000 0.90909 $ 9,090.90
    PV2 10,000 0.82645 8,264.50
    PV3 10,000 0.75131 7,513.10
    PV4 10,000 0.68301 6,830.10
    Total 3.16986 $ 31,698.60

    Can you find this value in the Present Value of Ordinary


    Annuity of $1 table?
    More Efficient Computation
    $10,000 × 3.16986 = $31,698.60
    Present Value of an Ordinary Annuity

    How much must a person 65 years old


    invest today at 8% interest compounded
    annually to provide for an annuity of
    $20,000 at the end of each of the next 15
    years?
    a. $153,981
    b. $171,190 PV of Ordinary Annuity $1
    c. $167,324 Payment $ 20,000.00
    d. $174,680 PV Factor × 8.55948
    Amount $171,189.60
    Deferred Annuity

    Deferred annuities are uniform series that


    do not begin until some time in the
    future.
    Deferred Annuity

    • If the annuity is deferred J periods then the


    first payment (cash flow) begins at the end
    of period J+1.
    Deferred Annuity

    Finding the value at time 0 of a deferred annuity


    is a two-step process.
    1. Use (P/A, i%, N-J) find the value of the
    deferred annuity at the end of period J
    (where there are N-J cash flows in the
    annuity).
    2. Use (P/F, i%, J) to find the value of the
    deferred annuity at time zero.
    Deferred Annuity Exercise-part 1

    • Suppose that a father on the day his son is


    born wishes to determine what amount would
    be paid into an account bearing an interest of
    12% per year to provide withdrawals of $2000
    on each of the son’s 18th, 19th, 20th and 21st
    birthdays
    Solution

    • N=21 , J=17
    • P17= A(P/A,12%,4)=$2000(3.0373)
    P17= $6074.6

    P0= F17(P/F,12%,17)=$6,074.6(0.1456)
    P0=$884.46
    Deferred Annuity Exercise-part 2

    • Suppose that the father wishes to determine


    the equivalent worth of the four $2000
    withdrawals as of the son’s 24th birthday.
    • This could mean that the 4 amounts were
    never withdrawn or re-deposited in an
    account earning 12% per year

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